The Supreme Court in its Decision File No. 33 Cdo 5377/2017 dealt with the assessment of the invalidity of legal acts under the former legislation on business law. The Supreme Court concluded that for a legal act that is manifestly against good morals under provision § 588 Act Mo. 89/2012 Sb., Civil Code, a contractual penalty agreement cannot be considered solely because of its excessive amount.

The Supreme Court assessed a lien creditor’s claim that arose due to a failure to repay their consumer credit debt payments as stipulated by the loan agreement properly and in due time. The loan’s principal amount was 80.000,- CZK with 40.000,- CZK in fixed interest. Late payments of principal and interest accrued a contractual penalty of 400,- CZK per day of delay. A contractual penalty of 500,- CZK was also arranged for each infringement of the obligation to identify the payment.

The first court ruled in favour of the lien creditor´s claim but the appeals court dismissed the claim, reasoning that the amount of the contractual penalty in such an amount contradicts – in context with the whole contract – good morals.

The Supreme Court did not share the opinion of the appeals court, and stated “an excessive contractual penalty cannot for its excessiveness cause the invalidity of agreement on the grounds of a breach of good morals, but it can be a reason for application of discretionary power of a judge to reduce an excessive contractual penalty” .The Supreme Court conceded, however, that if the circumstances under which the contractual penalty was stipulated contradicted good morals, the legal act could be then considered invalid.

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